Seagate CEO Luczo on Cloud, Returning Cash to Shareholders

By Tiernan Ray

Following a fiscal Q1 report by disk drive maker Seagate Technology (STX) that missed consensus estimates, and a forecast for this quarter’s revenue that was also lower than Street consensus, CEO Steve Luczo was kind enough to spend a few minutes chatting with me by phone.

Seagate shares traded down in after-hours by $2.40, or almost 5%, to $47.45.

Before he spoke with me, during a conference call with analysts immediately following the report, Luczo had remarked that the company was happy with the reception of its “hybrid” drives combining traditional magnetic discs with flash, a new “network-attached storage” system, something called “Kinetic open storage,” to reduce the cost of cloud computing, and a new technology in development called “shingled magnetic recording,” or SMR, which increases the areal density of disk drives.

But he also told analysts that there remains uncertainty among customers because of economic concern and technology transitions, as there has been in past quarters:

Turning to our December quarter outlook, we see the revenue and unit demand environment remaining relatively similar to what we have seen the last several quarters. While global macro economic conditions and technology transitions continue to provide a level of uncertainty with our customers, we are mindful of those factors and we are confident that we can continue to execute effectively.

During our phone conversation, I asked Luczo if his mind was more on macroeconomic concerns or on the broad move of enterprise computing to cloud computing. He said he was more focused on the latter, with economic trends more of the same — improvement here and there, followed by periodic retracements and uncertainty.

“That’s why I moved Rocky and Dave into more of a day-to-day role, so I could focus on these sorts of strategic issues,” said Luczo, referring to the company’s simultaneous announcement this afternoon that Dave Mosley, head of R&D, will become president of “operations and technology,” while Rocky Pimentel, head of sale and marketing, is becoming the president of “global markets and customers.”

I remarked to Luczo that the cloud, and the rise of flash-based storage, is producing a surge in startup companies with new software and technology for the traditional storage array, companies such as Violin Memory (VMEM), which recently went public, and Nimble Storage, which filed to go public two weeks ago. They are challenging traditional storage array makers such as Seagate’s customers, EMC (EMC) and NetApp (NTAP).

“Yes, but actually, I think things are swinging back a bit, back to the traditional enterprise vendors,” said Luczo. I asked him if it’s possible that the company can transition in this new cloud world from being merely a component and subsystems vendor to being more of a systems vendor, given that the newer architecture of the cloud in some senses removes much of the value from the traditional array, perhaps presenting an opportunity for the drive itself to gain more software smarts.

Luczo concurred. “Yes, I think that’s possible, and that’s why I want to spend more time on these strategic issues.” When I ask Luzco if an evolution of Seagate’s capabilities kicked lead to conflict with those system partners such as EMC, he dismisses the suggestion, stating that instead, “I think they’ll look to us as technology suppliers” for the new types of wares. “We will see higher margin, and they will save on some of their costs for R&D” as Seagate takes over development of some new higher-order technology functions, suggests Luczo.

Given how Seagate is regarded highly as a shareholder-friendly company, with a promise to pay out 70% of its annual operating cash flow in buybacks and dividends, I asked Luczo how he thinks about demands in the investment community to return more cash to shareholders — not demands on Luczo, mind you; he is in good shape with investors on that score, but more as a theoretical exercise.

Luczo said he and the board and shareholders are in sync, something that allows the company to return excess cash to shareholders while at the same time investing for the future. “I find it so odd that if you are returning cash to shareholders, people flip that around and act as if you no longer have any opportunities to grow your business,” said Luczo. “That’s just not the case.”

Then he added, “there has to be a balance. You have to be in conversation with shareholders and listening to what they want. But you also have to be doing what’s right for the company, which includes shareholders but also company employees and partners and customers. This sort of situation where one person has amassed one percent of the shares and says we’re going to tell you to do such and such I don’t believe in.”

Added Luczo, “We’ve been able to maintain a situation where we are able to invest in new technologies but also respect the need to return cash to shareholders.”

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.